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mid-1990s, a common form of business reorganization utilized by
corporations to eliminate or to reduce substantially the 4.5-
percent Texas corporate franchise tax on business income. See
Tex. Tax Code Ann. sec. 171.001(a)(1), (b)(3) (West 2002)
(imposing the Texas franchise tax on various business entities,
but not on partnerships).
The six specific steps in ADCS’ reorganization, all
occurring between January 18 and January 22, 1996, are reflected
below:
1. ADCS-Limited was formed as a Texas limited
partnership;
2. Advanced Delivery & Chemical Systems Holdings LLC
(Holdings LLC), was formed as a Delaware limited
liability company to be taxed as a partnership.
ADCS owned a 99-percent membership interest in
Holdings LLC. The individual shareholders of ADCS
owned the remaining 1-percent membership interest
in Holdings LLC;
3. Advanced Delivery & Chemical Systems Operating,
LLC (Operating LLC) was formed as a Delaware
limited liability company to be taxed as a
partnership. ADCS owned a 99-percent membership
interest in Operating LLC;
4. Advanced Delivery & Chemical Systems Manager, Inc.
(ADCS-Manager) was formed as a Delaware
corporation owned 100 percent by the individual
shareholders of ADCS. ADCS-Manager owned the
remaining 1-percent membership interest in
Operating LLC;
5. After the above entities were formed, 99 percent
of the operating assets of ADCS were transferred
to Holdings LLC, and the remaining 1 percent of
the operating assets of ADCS were transferred to
Operating LLC, except that (as stipulated by the
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